9.1 Under FASB 52, foreign exchange gains and losses a. b. c . flow into a special reserve account are usually determined according to the current rate method both a and b flow directly into the income statement d.
9.2 Translation exposure reflects the exposure of a company's a. foreign operations to currency movements b. c. d. foreign sales to currency movements financial statements to currency movements cash flows to currency movements
9.3 The current standard for measuring translation exposure is a. the current/noncurrent method b. c. d. the monetary/nonmonetary method
FASB 8
FASB 52
9.4 Under FASB 52, most financial statements must be translated using the a. monetary/nonmonetary method b. current/noncurrent method c. d. current rate method temporal method
9.5 The major difference between the temporal method and the monetary/nonmonetary method is that a. under the monetary/nonmonetary method, long-term debt is translated at the historical rate, whereas under the temporal method, long-term debt is translated at the current rate b . under the monetary/nonmonetary method, inventory is always translated at the historical rate, whereas under the temporal method, inventory may be translated at the current rate if the inventory is shown on the balance sheet at market values c. under the monetary/nonmonetary method, fixed assets are translated at the historical rate, whereas under the temporal method, fixed assets may be translated at the current rate d. under the monetary/nonmonetary method, accounts receivable are always translated at the historical rate, whereas under the temporal method, receivables may be translated at the current rate
9.6 Under a historical cost accounting system, as the United States now has, most accounting theoreticians would probably argue that the appropriate method for translation is the a. monetary/nonmonetary method b. c. current/noncurrent method current rate method

d . temporal method
9.7 The most important aspect of the FASB-52 is that a. it is consistent with generally accepted accounting practice that requires balance-sheet items to be valued according to their underlying measurement basis b. it disallows all reserves for currency losses c. it mandates a uniform translation standard for all firms d . most translation gains and losses bypass the income statement and are accumulated in a separate equity account on the parent's balance sheet
9.8 The functional currency of a Colombian manufacturing subsidiary selling exclusively to the U.S.
a. depends on where it sources its raw materials
b. depends on where it sells the completed product
c. will be the Colombian peso d . will be the U.S. dollar
9.9 The functional currency of a Mexican subsidiary that both manufactures and sells most of its output in Mexico will
a. always be the U.S. dollar
b. always be the Mexican peso
c. be the U.S. dollar unless Mexico has a high rate of inflation d . be the Mexican peso unless Mexico has a high rate of inflation
9.10 The functional currency of a German subsidiary that both manufactures and sells in Germany and competes primarily against Japanese firms
a. will be the U.S. dollar
b. c .
d. will be the Deutsche mark may be the Japanese yen will be the U.S. dollar unless German inflation is high
9.11 The functional currency of a Malaysian subsidiary that assembles computers using U.S.-made parts, which it then sells in the United States, would most likely be the a . U.S. dollar b.
Malaysian ringgit c.
The supplier’s currency d.
The lender’s currency
The following statement is to be used in answering questions 12 and 13.
Suppose the Swiss subsidiary of a U.S. company owes $1 million. During a recent period, the Swiss franc appreciated from $0.69 to $0.73, with an average exchange rate for the period of $0.71.

9.12 If the functional currency is the U.S. dollar, the net result under FASB-52 would be a a. b. transaction loss of $40,000 for the U.S. parent transaction gain of $56,383 for the U.S. parent c. d. e . transaction loss of $32,876 for the Swiss subsidiary transaction gain of $3176 for the U.S. parent no transaction gain or loss for either the subsidiary or parent
9.13 If the functional currency is the Swiss franc, the net result under FASB-52 would be a a. transaction loss of $40,000 for the U.S. parent b . c. d. transaction gain of $56,383 for the U.S. parent transaction loss of $32,876 for the Swiss subsidiary transaction gain of $3176 for the U.S. parent
The following information is to be used in answering questions 14-17.
Ajax Manufacturing's German subsidiary has the following balance sheet:
Cash, marketable DM 250,000 Current liabilities securities
Accounts receivable
Inventory (at market.
Fixed Assets
1,000,000
2,700,000
5,100,000
-----------------
DM 9,050,000
Long-term debt
Equity
Total liabilities plus equity
Total assets
Suppose the DM appreciates from $0.70 to $0.76 during the period.
DM 750,000
3,400,000
4,900,000
---------------
DM 9,050,000
9.14 Under the current/noncurrent method, what is Ajax's translation gain (loss).? a. a gain of $294,000 b . a gain of $192,000 a loss of $174,000 a loss of $12,000 c. d.
9.15 Under the temporal method, what is Ajax's translation gain (loss).?
a. a gain of $294,000
b.
c. a gain of $192,000 a loss of $174,000 d . a loss of $12,000
9.16 Under the current rate method, what is Ajax's translation gain (loss).? a . b. c. d. a gain of $294,000 a gain of $192,000 a loss of $174,000 a loss of $12,000

9.17 Under the monetary/non-monetary method, what is Ajax's translation gain
(loss).? a. a gain of $294,000 b. a gain of $192,000 c . d.
DIFFICULT a loss of $174,000 a loss of $12,000
9.18
Suppose the English subsidiary of a U.S. firm had current assets of £1 million, fixed assets of £2 million and current liabilities of 1 million pounds both at the start and at the end of the year. There are no long-term liabilities. If the pound depreciated during that year from $1.50 to $1.30, the translation gain (loss) to be included in the parent company's equity account according to FASB #52 is a. b. c. d .
0 since the current assets and current liabilities cancel
+$200,000
-$250,000
-$400,000
9.19 Suppose the German subsidiary of a U.S. firm had current assets of DM3 million, fixed assets of DM6 million and current liabilities of DM3 million both at the start and at the end of the year. There are no long-term liabilities. If the
DM depreciated during that year from $.48 to $.38, the FASB-52 translation gain
(loss. to be included in the parent company's equity account is
a. 0, since the current assets and current liabilities cancel
b. +$300,000
c. -$350,000 d . -$600,000
9.20 Transaction gains and losses that result from adjusting assets and liabilities denominated in a currency other than the functional currency must appear on the foreign unit's income statement unless the gains or losses are attributable to a . foreign currency transactions that are designated as an economic hedge of a net investment in a foreign entity b. intercompany foreign-currency transactions that are of a short- term
PART 2 nature
c. foreign-currency transactions that involve currency speculation
d. all of the above
9.21 Hedging cannot provide protection against ________ exchange rate changes. a . expected b.
nominal c.
real

d.
pegged
9.22 The basic hedging strategy involves a. reducing hard currency assets and soft currency liabilities b. c.
increasing hard currency liabilities and soft currency assets reducing soft currency assets and hard currency liabilities d.
converting soft currencies to hard currencies and lending hard currencies
9.23 Firms that attempt to reduce risk and beat the market simultaneously may end up with a.
more risk, not less b.
less risk c.
a profit as well as reduced risk d.
a loss as well as reduced risk
9.24 One argument that favors centralization of foreign risk management is the ability to take advantage of the portfolio effect through ________. a.
risk shifting b.
risk sharing c.
offshore banking d.
exposure netting
9.25 In a forward market hedge, a company that is long a foreign currency will ____ the foreign currency forward. a.
buy b.
sell c.
borrow d.
lend
9.26. A ________ involves simultaneously borrowing and lending activities in two different currencies to lock in the currency’s value of a future foreign currency cash flow. a.
forward contract b.
currency collar c.
money-market hedge d.
currency option
9.27 A __________ involves offsetting exposures in one currency with exposures in the same or another currency, where exchange rates are expected to move in such a way that losses on the first exposed position should be offset by gains on the second currency exposure and vice versa. a. forward contract b. currency collar c.
d. money-market hedge currency option

9.28 Which of the following is NOT a basic hedging technique during a currency depreciation? a.
b.
buy local currency forward sell a local currency put option c.
d.
reduce levels of local currency cash and marketable securities loosen credit (increase local currency receivables)
9.29
Compaq Computer has a £1 million receivable that it expects to collect in one year. Suppose the interest rate on pounds is 15%. How could Compaq protect this receivable using a money market hedge? a. b. c. d. borrow £1 million pounds today lend £1 million pounds today borrow £869,565 pounds today lend £986,754 pounds today
9.30 Suppose PPP holds, markets are efficient, there are no taxes, and relative prices remain constant. In such a world, a. b. c. d. hedging can not still be of value exchange risk management remains of vital concern markets are always free of inflation exchange risk is nonexistent
9.34 If you fear the dollar will rise against the Spanish peseta, with a resulting adverse change in the dollar value of the equity of your Spanish subsidiary, you can hedge by a. b. c. d. selling pesetas forward in the amount of net assets buying pesetas forward in the amount of net assets reducing the liabilities of the subsidiary selling pesetas forward in the amount of total assets
9.35 On March 1, Bechtel submits a franc-denominated bid on a project in France.
Bechtel will not learn until June 1 whether it has won the contract. What is the most appropriate way for Bechtel to manage the exchange risk on this contract? a. b. c. d. sell the franc amount of the bid forward for U.S. dollars buy French francs forward in the amount of the contract buy a put option on francs in the amount of the franc exposure sell a call option on francs in the amount of franc exposure

9.36 A Japanese firm sells TV sets to an American importer for one billion yen payable in 90 days. To protect against exchange risk, the importer could a. b. c. d. borrow yen, convert to dollars, and lend dollars for the interim period sell yen on the forward market sell a call option on yen buy a futures contract for yen on the IMM
9.37 If you fear the dollar will rise against the French franc, with a resulting adverse change in the dollar value of the equity of your French subsidiary, you can hedge by a. b. c. d. selling francs forward in the amount of net assets buying francs forward in the amount of net assets reducing the liabilities of the subsidiary selling francs forward in the amount of total assets